India's current account deficit (CAD) reflects the gap between exports and imports of goods and services, plus net income flows. CAD widened to 2.0% of GDP in FY23 from 1.2% in FY22, driven by higher crude oil prices and gold imports. Key drivers include merchandise trade deficit, services surplus, and remittance inflows. RBI manages CAD through forex interventions, capital flow measures, and monetary policy adjustments to maintain external sector stability.

Current account deficit represents India's external sector vulnerability, measuring how much the country borrows from abroad to finance consumption and investment beyond domestic savings. The deficit comprises merchandise trade (where India imports more than exports), services trade (where India has a surplus due to IT exports), primary income (investment returns), and secondary income (remittances). CAD sustainability depends on financing through capital flows - FDI, FPI, and external borrowings. When CAD exceeds 3% of GDP, it signals stress as seen during 2013 'taper tantrum'. RBI monitors CAD through multiple channels: forex market interventions to prevent rupee volatility, capital flow management measures during sudden stops, and coordination with government on trade policy. Rising CAD pressures rupee, increases inflation through import costs, and can trigger capital flight. However, moderate CAD reflects healthy investment demand and economic growth. RBI's response involves building forex reserves during surplus periods, implementing macroprudential measures, and using monetary policy to manage external pressures while balancing domestic growth objectives.